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BLDR > SEC Filings for BLDR > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for BUILDERS FIRSTSOURCE, INC.

Form 10-Q for BUILDERS FIRSTSOURCE, INC.


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 31, 2012 included in our most recent annual report on Form 10-K. The following discussion and analysis should also be read in conjunction with the unaudited condensed consolidated financial statements appearing elsewhere in this report. In this quarterly report on Form 10-Q, references to the "company," "we," "our," "ours" or "us" refer to Builders FirstSource, Inc. and its consolidated subsidiaries, unless otherwise stated or the context otherwise requires.

Cautionary Statement

Statements in this report which are not purely historical facts or which necessarily depend upon future events, including statements regarding our anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements in this report are based upon information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements made in this report involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investor and analyst communities, media representatives and others, depending upon their nature, may also constitute forward-looking statements. As with the forward-looking statements included in this report, these forward-looking statements are by nature inherently uncertain, and actual results may differ materially as a result of many factors. Further information regarding the risk factors that could affect our financial and other results are included as Item 1A of our annual report on Form 10-K.

COMPANY OVERVIEW

We are a leading supplier and manufacturer of structural and related building products for residential new construction in the U.S. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, aluminum and vinyl windows, custom millwork and trim, as well as engineered wood that we design and cut for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods, various window, door and millwork lines, as well as cabinets, roofing and gypsum wallboard. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.

We group our building products into five product categories:

Prefabricated Components. Our prefabricated components consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.

Windows & Doors. Our windows & doors category is comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units.

Lumber & Lumber Sheet Goods. Lumber & lumber sheet goods include dimensional lumber, plywood, and OSB products used in on-site house framing.

Millwork. Millwork includes interior trim, exterior trim, columns and posts that we distribute, as well as custom exterior features that we manufacture under the Synboard brand name.

Other Building Products & Services. Other building products & services are comprised of products such as cabinets, gypsum, roofing and insulation and services such as turn-key framing, shell construction, design assistance, and professional installation spanning all of our product categories.


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Our operating results are dependent on the following trends, events and uncertainties, some of which are beyond our control:

Homebuilding Industry. Our business is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, foreclosure rates, and the health of the economy and mortgage markets. During the downturn, which began in 2006, many homebuilders significantly decreased their housing starts because of lower demand and an excess of home inventory. However, according to the U.S. Census Bureau, U.S. single-family housing starts were at an annualized rate of 591,000 as of June 30, 2013, which is one of the highest levels achieved since 2008. Despite this increase, single-family housing starts remain well below the historical average of 1.1 million per year. Due to the lower levels in housing starts and increased competition for homebuilder business, we have, and will likely continue to experience pressure on our gross margins. We still believe there are several meaningful trends that indicate U.S. housing demand will likely recover in the long term and that the recent downturn in the housing industry is likely a trough in the cyclical nature of the residential construction industry. These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. Industry forecasters expect to see continued improvement in housing demand over the next few years.

Targeting Large Production Homebuilders. Over the past ten years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in our markets with certain profitability expectations. We expect that our ability to maintain strong relationships with the larger builders will be vital to our ability to expand into new markets as well as grow our market share. Additionally, we have also been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.

Use of Prefabricated Components. Prior to the housing downturn, homebuilders were increasingly using prefabricated components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of the homebuilders during periods of strong consumer demand. During the housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used prefabricated components, for the most part, still do. However, the conversion of customers to this product offering slowed over the past few years. We expect this trend to reverse as the residential new construction market continues to strengthen.

Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs and availability, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. Over the past few years, the mortgage markets have experienced substantial disruption due to increased defaults. This resulted in a stricter regulatory environment and reduced availability of mortgages for potential homebuyers due to an illiquid credit market and tighter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders continue to be constrained. As the housing industry is dependent upon the economy and employment levels as well as potential homebuyers' access to mortgage financing and homebuilders' access to commercial credit, it is likely that the housing industry will not fully recover until conditions in the economy and the credit markets improve and unemployment rates decline.

Cost of Materials. Prices of wood products, which are subject to cyclical market fluctuations, may adversely impact operating income when prices rapidly rise or fall within a relatively short period of time. We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured and prefabricated products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods may limit our ability to pass on such price changes. We may also be limited in our ability to pass on increases on in-bound freight costs on our products due to the price of fuel. Our inability to pass on these price increases to our customers could adversely impact our operating results.

Controlling Expenses. Another important aspect of our strategy is controlling costs and enhancing our status as a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. We have a "best practices" operating philosophy, which encourages increasing efficiency, lowering costs, improving working capital, and maximizing profitability and cash flow. We constantly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.


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Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction. However, we expanded our multi-family and light commercial business over the past several years to further diversify our customer base. We will continue to identify opportunities for incremental profitable growth in the multi-family and light commercial markets.

DEBT REFINANCING

In May 2013, we completed a private offering of $350.0 million in aggregate principal amount of 7.625% senior secured notes due 2021 ("2021 Notes") at a price equal to 100% of their face value. In conjunction with the offering, we also entered into a new 5-year $175.0 million senior secured revolving credit facility agreement ("2013 Facility") provided by a syndicate of financial institutions led by SunTrust Bank as administrative agent. We used the proceeds from this offering, together with cash on hand, to redeem $139.7 million in Second Priority Senior Secured Floating Rate Notes due 2016 ("2016 Notes"), to pay off our $225.0 million first-lien term loan due 2015 ("Term Loan"), including the prepayment premium, and to pay fees and expenses related to the transaction.

For the second quarter of 2013, interest expense included refinancing costs of approximately $48.4 million. These refinancing costs include the $39.5 million prepayment premium on the Term Loan, a $6.8 million write-off of unamortized debt discount on the Term Loan, and a $2.1 million write-off of unamortized deferred loan costs on the Term Loan and 2016 Notes.

These refinancing charges negatively impacted our results for the second quarter of 2013. However, as a result of our new capital structure our annual cash interest going forward will decrease by approximately $16.0 million, to approximately $28.0 million, assuming there are no borrowings under the 2013 Facility.

CURRENT OPERATING CONDITIONS AND OUTLOOK

Though the level of housing starts remains near historic lows, the homebuilding industry has shown improvement in recent quarters. According to the U.S. Census Bureau, the annualized rate for U.S. single-family housing starts at June 30, 2013 was 591,000, an 11.5% improvement from one year ago but approximately 59.7% lower than when the downturn began in 2006. For the second quarter of 2013, actual U.S. single-family housing starts were 172,300, a 14.0% increase compared to the second quarter of 2012. Actual single-family housing starts in the South Region, as defined by the U.S. Census Bureau and which encompasses our entire geographic footprint, increased to 88,400 in the second quarter of 2013, up 14.5% from the second quarter of 2012. Single-family units under construction in the South Region increased 27.4% during the second quarter of 2013 compared to the same quarter a year ago. While the housing industry has shown recent signs of improvement, the availability of credit to smaller homebuilders and potential homebuyers, a slow economic recovery and high unemployment rates, among other factors, could delay a stronger recovery. The National Association of Homebuilders ("NAHB") is forecasting 644,000 U.S. single-family housing starts for 2013, which is up approximately 20.0% from 2012, but still well below historical averages.

Our sales for the second quarter of 2013 were up 46.4% over the same period last year. We estimate sales increased 28.9% due to volume and 17.5% due to price during the second quarter of 2013 compared to the second quarter of 2012. We believe our broad offering of building products and construction services represents a value proposition to our customers that is superior to that of our competitors. We believe this allowed us to increase our sales volume at a rate in excess of the increase in residential new construction activity during the second quarter of 2013. Our gross margin percentage increased by 1.0% during the second quarter of 2013 compared to the second quarter of 2012. Our gross margin percentage increased 0.6% due to increased sales volume, with the remaining 0.4% coming from price and sales mix. We continue to prudently manage our operating expenses. We made significant changes to our business during the downturn that have improved our operating efficiency and allowed us to better leverage our operating costs against changes in sales. Our selling, general and administrative expenses, as a percentage of sales, were 17.3% in the second quarter of 2013, a 2.9% decrease from 20.2% in the second quarter of 2012.

We still believe that the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We believe we are well-positioned to take advantage of increased construction activity in our markets and to continue to grow our market share. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by working with our vendors to improve our payment terms and pricing on our products.


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SEASONALITY AND OTHER FACTORS

Our first and fourth quarters have historically been, and are expected to continue to be, adversely affected by weather patterns in some of our markets, resulting in reduced construction activity. Our first quarter 2013 financial results did not reflect the typical seasonality of our business due to improving housing demand and commodity lumber inflation. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:

The volatility of lumber prices;

The cyclical nature of the homebuilding industry;

General economic conditions in the markets in which we compete;

The pricing policies of our competitors;

The production schedules of our customers; and

The effects of weather.

The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables. Working capital levels typically increase in the second and third quarters of the year due to higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which historically have been financed through available cash and borrowing under available credit facilities. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow.

RESULTS OF OPERATIONS

The following table sets forth, for the three and six months ended June 30, 2013
and 2012, the percentage relationship to sales of certain costs, expenses and
income items:



                                                   Three Months Ended              Six Months Ended
                                                       June  30,                      June  30,
                                                  2013            2012           2013           2012
Sales                                               100.0 %        100.0 %        100.0 %        100.0 %
Cost of sales                                        79.3 %         80.3 %         79.9 %         79.9 %

Gross margin                                         20.7 %         19.7 %         20.1 %         20.1 %
Selling, general and administrative expenses         17.3 %         20.2 %         18.1 %         21.5 %
Facility closure costs                                0.0 %          0.0 %          0.0 %          0.1 %

Income (loss) from operations                         3.4 %         (0.5 )%         2.0 %         (1.5 )%
Interest expense, net                                15.4 %          3.8 %         10.3 %          4.8 %
Income tax expense                                    0.1 %          0.1 %          0.1 %          0.1 %

Loss from continuing operations                     (12.1 )%        (4.4 )%        (8.4 )%        (6.4 )%
Income (loss) from discontinued operations,
net of tax                                            0.0 %         (0.0 )%        (0.0 )%        (0.0 )%

Net loss                                            (12.1 )%        (4.4 )%        (8.4 )%        (6.4 )%


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Three Months Ended June 30, 2013 Compared with the Three Months Ended June 30, 2012

Sales. Sales for the three months ended June 30, 2013 were $398.1 million, a 46.4% increase over sales of $271.9 million for the three months ended June 30, 2012. According to the U.S. Census Bureau, actual U.S. single-family housing starts increased 14.0% in the second quarter of 2013 as compared to the second quarter of 2012. In the South Region, actual single-family starts increased 14.5% in the second quarter of 2013 as compared to the second quarter of 2012, while the number of single-family units under construction increased 27.4% over this same time period. We estimate sales increased 28.9% due to volume and 17.5% due to price during the second quarter of 2013 compared to the second quarter of 2012.

The following table shows sales classified by product category (dollars in millions):

                                                      Three Months Ended June 30,
                                                   2013                          2012
                                          Sales       % of Sales        Sales       % of Sales        % Change
Prefabricated components                 $  78.2             19.7 %    $  51.2             18.8 %          52.7 %
Windows & doors                             77.8             19.5 %       59.3             21.8 %          31.2 %
Lumber & lumber sheet goods                149.2             37.5 %       87.9             32.4 %          69.8 %
Millwork                                    35.2              8.8 %       26.4              9.7 %          33.3 %
Other building products & services          57.7             14.5 %       47.1             17.3 %          22.6 %

Total sales                              $ 398.1            100.0 %    $ 271.9            100.0 %          46.4 %

Commodity prices for lumber and lumber sheet goods were on average 21.5% higher in the second quarter of 2013 than in the second quarter of 2012. Overall, prices have risen to levels not seen on a consistent basis since 2006, though prices did fall approximately 30.0% during the latter half of the second quarter of 2013. This commodity price inflation has resulted in sales growth for lumber and lumber sheet goods and prefabricated components exceeding that of our other product categories. However, increased sales volume was achieved across all other product categories consistent with the increase in housing activity for the quarter.

Gross Margin. Gross margin increased $28.6 million to $82.2 million. Our gross margin percentage increased from 19.7% in the second quarter of 2012 to 20.7% in the second quarter of 2013, a 1.0% increase. Our gross margin percentage increased 0.6% due to increased sales volume and our ability to leverage fixed costs within cost of goods sold, with the remaining 0.4% coming from price and sales mix.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $14.1 million, or 25.6%. Our salaries and benefits expense, excluding stock compensation expense, was $44.0 million, an increase of $10.0 million from the second quarter of 2012. Delivery expense increased $2.0 million and other general administrative expense increased $1.4 million as compared to the second quarter of 2012, both due to increased sales volume.

As a percentage of sales, selling, general and administrative expenses decreased from 20.2% in 2012 to 17.3% in 2013. As a percentage of sales, salaries and benefits expense, excluding stock compensation expense, decreased 1.5%, delivery costs decreased by 0.7%, occupancy expense decreased by 0.4% due to the fixed nature of the category and other general administrative expense decreased 0.2%.

Interest Expense, Net. Interest expense was $61.1 million in the second quarter of 2013, an increase of $50.6 million from the second quarter of 2012. The increase in interest expense primarily relates to our recent refinancing transaction and includes $6.8 million of unamortized debt discount write-offs and $2.1 million of debt issuance cost write-offs in the second quarter of 2013, as well as a $39.5 million prepayment premium related to the termination of our Term Loan.

Income Tax Expense. We recorded income tax expense of $0.4 million and $0.1 million during the three months ended June 30, 2013 and 2012, respectively. We recorded an after-tax, non-cash valuation allowance of $17.0 million and $4.3 million in 2013 and 2012, respectively, related to our net deferred tax assets. Absent this valuation allowance, our effective tax rate would have been 34.6% and 34.9% in 2013 and 2012, respectively.


Table of Contents

Six Months Ended June 30, 2013 Compared with the Six Months Ended June 30, 2012

Sales. Sales for the six months ended June 30, 2013 were $ 717.9 million, a 46.1% increase over sales of $491.3 million for the six months ended June 30, 2012. According to the U.S. Census Bureau, actual U.S. single-family housing starts increased 20.1% in the first six months of 2013 as compared to the first six months of 2012. In the South Region, actual single-family starts increased 20.6% compared to a year ago, while the number of single-family units under construction increased 25.7% over this same time period. We estimate sales increased 29.4% due to volume and 16.7% due to price during the first six months of 2013 compared to the first six months of 2012.

The following table shows sales classified by product category (dollars in millions):

                                                       Six Months Ended June 30,
                                                   2013                          2012
                                          Sales       % of Sales        Sales       % of Sales        % Change
Prefabricated components                 $ 139.0             19.4 %    $  94.7             19.3 %          46.8 %
Windows & doors                            141.4             19.7 %      109.0             22.2 %          29.7 %
Lumber & lumber sheet goods                266.1             37.1 %      154.4             31.4 %          72.4 %
Millwork                                    64.3              8.9 %       47.8              9.7 %          34.4 %
Other building products & services         107.1             14.9 %       85.4             17.4 %          25.4 %

Total sales                              $ 717.9            100.0 %    $ 491.3            100.0 %          46.1 %

Commodity prices for lumber and lumber sheet goods were on average 35.6% higher in the first six months of 2013 than in the first six months of 2012. Overall, prices have risen to levels not seen on a consistent basis since 2006, though prices did fall by approximately 30.0% during the latter half of the second quarter of 2013. This commodity price inflation has resulted in sales growth for lumber and lumber sheet goods and prefabricated components exceeding that of our other product categories. However, increased sales volume was achieved across all other product categories consistent with the increase in housing activity for the quarter.

Gross Margin. Gross margin increased $45.8 million to $144.6 million. Our gross margin percentage was 20.1% for the first six months of 2013 and 2012. Our gross margin percentage increased 0.7% due to increased sales volume and our ability to leverage fixed costs within cost of goods sold. However, this increase was offset by a 0.7% gross margin decrease due to commodity lumber inflation primarily in the first quarter of 2013 relative to customer pricing commitments.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $24.3 million, or 23.0%. Our salaries and benefits expense, excluding stock compensation expense, was $81.6 million, an increase of $16.5 million from the first six months of 2012. Delivery expense increased $3.4 million and other general administrative expense increased $2.5 million as compared to the first six months of 2012 due to increased sales volume.

As a percentage of sales, selling, general and administrative expenses decreased from 21.5% in 2012 to 18.1% in 2013. As a percentage of sales, salaries and benefits expense, excluding stock compensation expense, decreased 1.9%, delivery costs decreased by 0.8%, occupancy expense decreased by 0.5% due to the fixed nature of the category and other general administrative expense decreased 0.3%.

Interest Expense, Net. Interest expense was $73.6 million in the first six months of 2013, an increase of $50.0 million from the first six months of 2012. The increase in interest expense primarily relates to our recent refinancing transaction and includes $6.8 million of unamortized debt discount write-offs and $2.1 million of debt issuance cost write-offs in the second quarter of 2013, as well as a $39.5 million prepayment premium related to the termination of our . . .

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